Godrej Consumer : Jump in insecticides sales boosts results: HSBC

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Godrej Consumer Products (GCPL)
N: Jump in insecticides sales boosts results
􀀗 GCPL sales up 65.5% (in line), PAT up 40.8%, 2.6% above
consensus and 5.9% above our estimates
􀀗 Soaps continues to decline, hair colour returns to norm,
insecticides growth exceptionally high
􀀗 Remain Neutral, keeping estimates unchanged. Valued at INR445
on PE multiple basis

Good results: GCPL reported sales of INR9528m, up 65.5% yoy, in line with expectations.
Soaps business declined c10% on the back of intense competition, hair colours grew 21% and
household insecticides (India) grew 38% on the back of market share gains and high industry
growth. Gross margins for the standalone business grew by 55bp due to favourable product
mix impact but for consolidated business was lower by 132bp yoy due to lower margins in
Keyline Brands and the newly acquired Latin America business. PAT was benefited by lower
than expected interest rate and a lower tax rate due to one-offs.

Key concerns: While the results were better than anticipated, we note that this was on the
back of exceptionally high growth in insecticides and lower tax rates, and therefore this quarter
could be the best quarter in the year. Competitive intensity in soaps remains very high, and
GCPL has been unable to take price increases on the back of cost pressure in soaps yet; if it
does, a volume backlash is possible. Competitive intensity in hair colours could increase in the
medium term as P&G has launched Wella, Emami has entered the space and Garnier/Loreal
keeps up the pressure. Moreover, while market share gain in insecticides is commendable, the
high industry growth this year makes for a difficult base to grow next year.

Neutral: We value GCPL on 21x Sep 2010 PE multiple. This is a 20% premium to its
historical multiple, which we believe it deserves as it has entered higher growing
categories. Our multiple is however lower than other FMCG companies to factor in the
risk from several new acquisitions — there is a risk that PE could expand as investors get
familiar with these and the company continues to deliver without problems. Thus, we are
Neutral on GCPL but with a positive bias as risk to the PE multiple is skewed upward.